What you need to know about end of service benefit
IF YOU are like most expatriate workers in the Gulf Cooperation Council (GCC) countries, you will not have access to an occupational pension scheme of the kind often found in developed countries.
Instead, your employer will almost certainly be required by law to make a one-off lump sum payment, called end of service benefit (EOSB), to you when you leave. This will be the case whether you are retiring or because you are moving on to a job with another employer.
However, strategic research company Insight Discovery said earlier this month that there is a critical need to restructure the GCC’s end of service benefit system.
cashy took some time out with its chief executive, Nigel Sillitoe (pictured), to find out why – and what it all means for consumers. Here’s what he had to say…
How is EOSB worked out?
EOSB is what financial professionals call a ‘defined benefit’ type payment, in that its size is a function of your length of service and the size of your salary.
Why does the system need to be restructured?
Although the EOSB system is much better than nothing at all, it has a number of problems.
From the point of view of your employer, the EOSB represents an inescapable legal liability that has the potential to grow very rapidly.
Although many employers in the GCC countries do provide for EOSB payments in their profit and loss accounts, they do not necessarily have the ability to find the cash that they need.
This problem is exacerbated at times of cyclical economic downturns. At precisely the time it is most difficult to find cash, an employer potentially has to find very large sums to make EOSB payments to great numbers of departing employees.
What might this mean for me as an employee?
From your point of view, your entitlement to the EOSB is essentially a loan to your employer: as a major long-term investment, it may well be unsuited to your needs following your service in the GCC countries.
Further, your asset may be at risk if your employer encounters financial problems.
What does the future hold?
The EOSB is an issue that you will likely hear much more about in the coming year or so. The amount of money involved is huge. RBC cees, a leading global specialist in employee benefit plan and fund administration, estimates that the combined EOSB of employers in the United Arab Emirates alone is estimated at $4 billion.
Other observers suggest that, across all the GCC countries, the total liability could be a minimum of $16bn and as high as $25bn. It is very possible that the total liability is growing at double-digit rates and is projected to increase to $75bn by 2030.
What can employees do to protect themselves?
If you are like most employees, you will receive your EOSB without any problems at the end of your time with your employer. However, there are a number of questions that you can usefully start asking now.
How much money do you expect to receive as an EOSB, and when? How does your EOSB fit in with your overall financial plan? In particular, do you need to make additional savings?
Some employers in the GCC actively encourage their employees to save by providing access to insurance, mutual funds and other investment products from carefully selected suppliers – and with the benefit of low fees: is this the case with your employer?
Is the money with which your employer will pay your EOSB ‘ringfenced’ from the employer’s other assets in the event that your employer encounters financial problems?
Do you have an established relationship with a local lawyer, together with a clear understanding of your rights under local law to your EOSB? Put another way, do you know what you would do in the (probably unlikely) event that something goes wrong?
As ever, you should seek professional advice when looking into personal financial matters.
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